A complete Financial blog with special emphasis on news, analysis and fluctuation in Indian Stock Markets & its indices NSE Nifty and BSE Sensex. Constant tracking of tug-of-war between the Bulls & the Bears. Also read about various Asset class such as IPO, Bullion, Commodities, Mutual Funds, Real Estate among others.

Thursday, March 19, 2009

The Indian equity markets have corrected by a whooping 60% from its peaks recorded around January 2008. The above mentioned slump of more than half of the all-time highs is, specifically, in terms of correction in the indices – Nifty and Sensex. Whereas the constituent stocks of the above indices have declined even sharper, inflicting deeper pain on the back of large losses booked by investors. The story is even worse for those investors who kept holding their portfolio with the hope of a ‘turn around’ recovery in the economy & eventually an upswing in the equity markets which led to further mark-to-market losses on their cost of acquisitions of the constituent stocks in their portfolio.

Working of Bear Markets:

As we get deeper into bear markets, the equity investors are increasingly losing faith & sheen in the stock markets. The braoder market is either poised for a long-drawn range bound movement or resume its journey towards attaining its illusive bottom levels. During such bear markets, investors tend to lose interest in equity markets & stay away as a natural instinct on constantly witnessing markets making newer lows. Even investors holding substantial cash & sitting on the side lines, tend to delay their decision of investing in markets until there is some semblance of stability or a new wave of up move.

This article is primarily aimed at new investors who wish to start accumulating good stocks, but have little knowledge as to how to get started with it & which stocks to buy due to their scope of limited knowledge & research in equity markets. Though, even other investors can take a clue from the list of stocks mentioned in this posting as to how to divide the portfolio into parts and give varied importance to different parts of the portfolio depending upon their fundamentals.

Value Investing:

However, long-term investors can find good value among strong fundamental stocks during such depressing times. Most of the big wealth is created by making shopping decisions during times of extreme pessimism and cautious outlook.

The valuations are much more subdued and reasonable during such times when supply outstrips demand. During such phase of slowdown, the investment strategy needs to be staggered as the worst is not yet over for the markets. The price may further dip from the cost of acquisition of investors, but in longer-duration the chances of substantial appreciation stands good and strong.

Building-up of Equity Portfolio:

In this posting, I have discussed about Portfolio Building for Long-term Investment in Equity markets. I will speak out my view on my favourite list of stocks that should constitute as a part of one’s long term aspirations from equity portfolio. The list is reflection of my views on stocks to be held for long term. But, the views of investors can differ from this list of stocks depending upon individual risk profile, long term goals, outlook on equity markets, expected return ratio, age-profile of the investor and many other aspects that goes into determining the portfolio features of an investor.

It is also important to understand that a long-term portfolio should be well Diversified in terms of exposure to specific ‘Sector/Industry’ and even in a ‘Stock specific’ way.

Prior Objective Analysis:

Before building or starting up with a new portfolio, the investor should carry out certain analysis of his future needs & expectations in terms of returns from his money intended to be invested for long-term goals. Without the direction to your portfolio goal, it will run into troubles caused by lack of clarity about future goals and expectations. Like, for example, an investor who has no goal for his money invested, may not be able to determine his target to book profits on his portfolio, as may be suited to his future requirement.

Another case in point, supposes an investor is investing for long-term through Mutual funds. If he has no clear priority in his goals, how would he determine whether to invest in the ‘Dividend’ option of the scheme (which pays dividends based on the fund returns) or to subscribe ‘Growth’ option scheme (where the fund culminates all the returns that accrue to the fund & reinvest the money for further growth). Dividend option gives the investor an option to get regular income in the form of dividends announced by the fund on regular basis. On the other hand, if the investor feels he would be in no dire need of funds in between the time intervals, he may as well opt for the ‘Growth’ scheme of the Mutual fund.

Balancing of Equity Portfolio:

(A) Magnetic touch of Speculation: Equity investments is, traditionally, regarded as ‘long only’ portfolio with a primary objective to earn steady income in the form of ‘dividends’ & secondary aim to earn returns on capital from investments. But, with on set of every new bull phase, this feeling of stable & safe returns is vindicated once investors taste the blood of ‘short-term gains’. Investors get attracted by the prospects of quick gains in few months over long-term wealth creation process.

(B) Categorizing Portfolio: Smart investors are aware that such short-term speculative trading is fraught with dangers of market uncertainty & unpredictability. Sharp market fluctuations can as well inflict painful losses to such investors who may have diverted their attention from ‘long-term portfolio building to short-term speculation’ unless market sustains in positive. To counteract this dichotomy risk of sharp portfolio fluctuation, investors shall go for division of portfolio into 3 different categories.

Core Portfolio: The Core long-term portfolio refers to a specific set of few very good fundamental stocks that needs to be held for long-term without indulging into trading in these stocks irrespective of trading opportunities based on news/technical indicators/actions related to these stocks. Though, that does not mean that investors should stop tracking the prospects of these stocks once they are bought as a part of their ‘Core’ long-term portfolio. Investors should keep tracking even the best of the best company in their portfolio in the light of current market events, prospects & potential.

Short-term Portfolio: Short-term portfolio is, on the other hand, dictated by a number of market forces like news, rumors, technical indicators, triggering of set target and most importantly exiting when Stop loss levels are hit. Stop loss plays a very important part in determining exit on failure of the call to thrive as per expectations on the stock. Risk management strategies need to be adopted in short-term calls in order to ride out the market uncertainty & fluctuations.

In this posting, we will concentrate on discussions about stocks to be constituted as a part of building ‘Core Portfolio’ and ‘Long-term Portfolio’.

(A) Core Portfolio:Note: Core portfolio is a list of ‘must have’ stocks in any good long-term portfolio. All the above mentioned 7 stocks should form a part of a core portfolio. As to how much should each of the above stocks constitute as a part of the over-all portfolio in Percentage terms would be dealt in next article on Diversification of Portfolio.

1) Reliance Industries: This stock has a long tradition of rewarding its share holders driven by its diversified business operations led by crude Refining & more recently gas discoveries. The stock has an immense unlocking prospects & large potential reserves in initial stage of discoveries.

Accumulation Zone: Rs.900-1220.

2) Larsen & Toubro: It is yet another diversified stock from engineering & capital goods space with its wings spreading in various sectors like shipping, defense, nuclear power, IT, etc. L&T holds a pending order book of over Rs.75,000 crore. It is a leading Engineering & construction (E&C) company in India.

Accumulation Zone: Rs.450-650.

3) Bhel: It is the largest power equipment manufacturer in India with a pending order book position of over Rs.1 lakhcrore. This PSU company forms a core part in India’s emergence as a nuclear power & energy. The company has proven capability of executing power projects from concept to commissioning.

Accumulation Zone: Rs.950-1250.

4) NTPC: This company is by far the largest thermal-power generating company with highest share of power being produced in India. This PSU is placed at the core of India’s nuclear ambitions. The stock has been an out-performer versus the benchmark indices on the back of strong prospects of the power sector and fundamentals of this power company.

Accumulation Zone: Rs.115-145.

5) State Bank of India: This Public sector bank is the one of the largest financial institution in India which holds a record number of branch network spread across India – including urban & rural areas. This large-cap bank is leading the race in providing cheaper & subsidized loans to spur the economy.

Accumulation Zone: Rs.750-950.

6) Power Grid: This PSU Company is a clear case of monopoly in the transmission sector with one of the largest grid network in India. The company has a market share of around 40-50% in the Transmission sector. The company also provides transmission-related consultancy services.

Accumulation Zone: 55-70.(7) Reliance Comm: This telecom company has presence in both GPRS and CDMA networks. The company has more recently spread its wings within the GPRS network on acquiring licenses for pan India network. The stock has recently witnessed a sharp correction.

Accumulation Zone: Rs.135-185.

(B) Non-Core Large Cap Portfolio:

(Figures within brackets represent the levels of ‘Accumulation Zone’)

1) ONGC (Rs.550-650)2) TCS (Rs.400-550)3) HDFC Ltd. (Rs.900-1200)4) ICICI Bank (Rs.250-350)5) ACC (Rs.450-550)6) Grasim (Rs.800-1200)7) ITC: (Rs.135-155)8) Cipla (Rs.145-175)9) M&M (Rs.250-350)10) Sterlite Ind. (Rs.180-240)11) DLF (Rs.125-175) Note: From the above 11 Large Cap stocks, investors should not for all the stocks in the list. They can choose 6-7 stocks depending upon size of an investor’s portfolio, Sector prospects from time to time & the portfolio features & expectations of investor.

Note: From the above list of 11 stocks of Core Mid-cap portfolio, Investors should select and buy at least 6-7 stocks from long-term horizon. All the above stocks are fundamental picks from the mid-cap space.

Note: From the above list of 20 Non-core Mid-cap portfolio, investors can select remaining part of the mid-caps stocks to complete their portfolio balance. How much of mid-caps to select will be discussed in my next article.

Extra Notes:

1) PunjLlyod: Looking at the fundamentals & price erosion in stock value of PunjLlyod, the stock would have been included in the ‘Core Mid-cap Portfolio’ category. But since we already have L&T as a part of Large-cap Core portfolio, investors can determine the decision of buying this stock as ‘Optional’ in nature.

2) LICHsg. Finance: Even this stock would have easily formed a part of core mid-cap portfolio based on its superior fundamentals, low beta fluctuation & cheap valuations, but for the presence of another stock from the same sector- HDFC Ltd in large-cap Non-core portfolio. Though, investors who have not opted to Buy HDFC Ltd. could certainly include LICHsg. Fin in the core mid-cap portfolio.

Dark Horses:

Some stocks can prove as 'Dark Horses' for long-term investors if they are bought at lower levels and valuations. Currently, these stocks may not be in lime light due to some fundamental problems or High Debt problem or Pledge issues or Credit crunch (or if nothing, just that the stock may have melted down on the back of severe bear phase) that some of these stocks may be suffering from. But as and when there is recovery & stabilization in the global market conditions over longer duration, these stocks may fare well if all things fall right for such stocks. These stocks can as well be termed as 'Contra' bets.

In My Next Post:I will discuss as to how to arrive at a well-diversified list of portfolio from the above mix of large-cap & mid-cap stocks both. The strategies that could be adopted to get a right mix in terms of sector allocation & (market) capitalization levels of the above stocks. So, in my next posting, don’t miss out on various strategies that could be adopted while diversifying & risk minimization of portfolio.

Share your Favourite Portfolio in the 'Comments' section:Readers are requested to post their view/query/suggestion on the above PORTFOLIO in the 'Comments' section. Readers can also post & share their favourite portfolio constituents for 'Long-term Investments' in the same Comments section. This will make this posting on Long-term portfolio more interesting, interactive & explore new stock ideas among themselves.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

22 comments:

Thanks for your comments. My intention is, in bull markets, one can easily have a good time investing in health care stocks. I would also like to add few more like Lupin, Glenmark and Opto Circuits (Medical Electronics).

Same applies to banking/finance sector. A positive sentiment will make such stocks a good buy. i.e. BOI, PNB

I think this is just the best pack of extremly good portfolio. all scripts are valuable and prices estimated to pick them are just perfect. i think one holding this scripts will be he most profitanle in bull run which is expected to start by end of 2010..... pls. continue this good work

excellent insight.but dont you think its too early to take plunge into market? I still feel we have not hit the bottom.Elections around the corner and post elections the scenario looks very scary.we may have a situation like 1996-1998 if third front or third front supported by cong forms the govt.I suggest ppl should think of investing after election results and govt formation.

my gut feeling says we may dip below 6000 on sensex.we are heading to delfation & couple of big scams will spook the market.Scam in couple of banking & real estate stock will hit market in next few months.Stay alert.

It is not possible to include all possible stocks from a certain sector as i'm trying to short-list & include least possible stocks for the list.

Anyways, for you i will make a mention of another 2 pharma sectors stocks: Sun Pharma & Fortis Healthcare. Both are good stocks, but from valuations point of view i am not so comfortable with these 2 stocks. And, hence i have not included them in the list. Though, investors shall note over here that Fundamentals of Sun Pharma are good enough to be considered for inclusion in the long-term list, if in future, its valuations come down.

Bulls, thank you for being as comprehensive as possible and giving us the list of ur favourite stocks.....can you please let me know what is considered the normal duration....when you say long term....?5-7 yrs horizon?

Personally, I dont track IKF Technology. So, i have not included this small-cap stock in my list. So, pls do you own research & due-diligence before indulging in this stock.

Frankly, i dont prefer small-cap stock as they're richly associated with as much RISK as their potential to give returns. I feel such stocks (small-caps) should not constitute more than 5-7% of one's over-all portfolio. I wll share more of my views on small-caps in my next topic on 'DIVERSIFICATION' of Equity Portfolio.

Coming to your query on NIIT Ltd. vs. Aptech,i anytime prefer NIIT Ltd. to Aptech based on current valuations. Aptech is not only expensive but also a smaller company in relation to NIIT Ltd.

Also, in NIIT Ltd. is a more comprehensive play than Aptech which is basically concentrated in Education. Also, a point ot note over here is NIIT Ltd.

When the stock market was on top a year before, there were many companies trying to demerge and list their subsidiary companies like ICICI, HDFC, Sterlite, Kotak, Reliance, etc., and create value unlocking for the share holders... just as the example we saw when two ambani brothers were divided...

Most of the banks are planning to list their subsidiaries, how do u see this as wealth creation for a particular stock in coming 2 or 3 years... as market might be better then and so will the companies go for it...

Don't you think we should consider this value unlocking thing while selecting a stock when planning for 2 - 5 years horizon...?

Your query on value-unlocking is very genuine. But, here i have a point to make that such concepts of value-unlocking is always positive, but more effective during times of bull run.

During such optimistic times, when the valuations are somewhat at their peaks, such triggers like value-unlocking or demergers may be needed to 'PUSH-UP' the valuations upto the brink.

Though, from long-term point of view, these phenomenons will be back in vogue with the return of the stabilized periods.

Some stocks with bright prospects of value-unlocking stand in:

R.capital, ICICI, RIL, M&M, SBI, DLF, Telecom majors, like Bharti & R.Comm, with seperate subsidiaries of Tower Infrastructure, and many other companies with small Power subsidaries as a small part of their business operations, especially, with the potential of the Power sector to remain in buzz for next few years to come.

But, conclude with, i would like to ADD a point over here that, value unlocking does not represent change in business fundamentals of a company. It is just a seperation of a subsidiary as a stand-alone entity. Though, this could bring some benefits like seperate specialized departments with the seperating company, seperate set of skilled employees, technologies, company' policies & most of all 'DISTINCT ATTENTION' from the management of the company.

Thanks for a very good posting Bulls. I quite like most of the picks but Reliance communications. I am not sure whether company has any plans to spread it's wings in upcoming 3G as surely it will be a talk for next 5-7years. I am holding it though at 370 but not sure if I can recover my money in next 2 years. Will be helpful if you shed some light.

RELIANCE COMMUNICATIONS - i have specifically included in my 'CORE PORTFOLIO' list. Though, logically speaking, even better deserving stock than R.Comm for this spot would be Bharti Airetl based on fundamentals till date.

But, from valuations point of view, currently R.Comm is way too lucrative in comparison to Bharti Airtel. Not that R.Comm is way behind in terms of market reach vis-a-vis Bharti. R.Comm is second biggest company thriving in one of the fastest growing Telecom market in India.

R.Comm is involved in providing both types of services- CDMA and GPRS to its subscribers. I feel even this company should successfully venture in 3G services to its subscribers over longer duration, no doubt in that.

From long-term point of view, this ADAG group stock can give multiple returns during the next bull phase. The company has a strong infrastructure network of towers & reach with good penetration among rural arena.

FOOTNOTE: Risk averse investors can go for steady & safe Bharti Airtel. But for others Reliance Communication, is a 'MUST BUY' at current valuations & prospects.-BULLS

I think this is a very comprehensive list of stocks....For sure one can make good money by investing in some of these stocks with a 5 year time horizon...

I would also like to talk about IKF and I think it might not be a great company to invest in...The management has been trying to put their hands into too many things and there has been more plans then execution so far...Moreover the raw materials for biofuel are costly and I dont think the company can have great margins even if they have decent sales numbers some years down the line...So in my opinion its a avoid...

Also among your dark horses I like HCC and in my opinion it will give more then decent returns over long term...

One stock that I would like to add in core portfolio is Aban Offshore. Factors like global recession leading to lack of demand for oil, fall in crude prices from $147 to $45, lesser interest by various oil exploration companies has resulted in stock price hammered down heavily, so much so that it has lost almost 95% of it's value from peak. Higher debt burden and 6 idle rigs have increased the problem many fold. But in my opinion, things can only improve from here on. Oil being a natural resource and depleted reserve will only cause oil prices to move up as soon as world economy start recovering. Oil exploration companies will come back to exploit this opportunity and hence fundamentals of AbanOffshore will be back on same track. It's just matter of time before this happens. High risk taker must exploit this opportunity to grab this stock at dirt cheap price. Remember, Most of the big wealth is created by making shopping decisions during times of extreme pessimism.If Aban could sail through this tough time (which is quite likely considering is track record, results of past several qrtrs and quality management), this is possibly a next multibagger.

Thank you Mr Ashish on your views on Aban Offshore. I would say, i almost agree with you explanation on this Offshore & drilling stock.

I also agree with your views related to the stock on risk & returns aspect for this stock.

Just as u said, if the stock is able to survive to current downturn, it can most likely give multiple returns. But, it is to be seen how the company comes out of its Debt position over a period of time. Its high debt is a bigger concern than slowdown in Crude prices & demand. Though, in the final effect, its stock price depicts adverse stock demand on the back of both the factors.

Somewhat same is the case for UNITECH. If it is able to pass through this stage of slowdown, even this company can give multiple returns over a period of time. But, i prefer DLF over Unitech.

Dear Faisal...

Thank you for your encouraging comment. Also, i equally agree with your views on IFK & HCC. In fact, HCC is a wonderful buy at current valuations.

I've couple of concerns as far IKF is concerned.1) Manufacturing cost of Bio-diesel is close to $40 and since crude itself is hoveing around this same value, demand for bio-diesel has gone down. No wonder great companies like PrajIndustries is beaten down heavily because of this reason. IKF being small player will ahve to come out smoothly from this down turn and see the light of the day when crude will surpass atleast $70 and demand for bio-diesel goes up.2) Even if we assume there is tremendous potential in this sector and company considering crude will go up sooner or later, then Why promoters have not increased their holding(14%) in this company which is tradin @ just Rs2. i dont think they will ever get better time than this to hike their stake and then enjoy the fruits of hard work when company turns around.I dont know many rather any company where promoter had just 14% stake and later it turned out to be a multibagger. If company's fortune is going to change, then it's promoter/management who get to know this before anyone else.

Dear BullsIts a really nice post and I agree with most of the scrips you have chosen. I hope the election menace and deflation stigma may bring down the market a little more in recent future. Still the buy range is very much logical.

I also would like to appreciate your devotion to answer each and every query by readers.

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Date: January 30, 2009.

My ViewWith Union Budget round the corner, one can expect Nifty to remain range bound from 4750-5050 & take a directional cue after the Budget outcome. The post-budget bias could be tilted towards the downside as FM could be gearing to withdraw selective sops given to the industry during the recent slowdown & pull the economy out of record deficit.